Broadly speaking, a “consultant”[1] is someone who is in business on their own account (ie self-employed) and who can negotiate their own terms as well as decide when, and how, work is carried out. They are often engaged to provide specific expertise or to assist with a particular project.
The tests for determining status[2] for employment law and tax purposes are not the same, but they are similar and tend to (yet do not always) lead to the same conclusion. It is possible, therefore, for an individual to be considered “self-employed” for tax purposes but regarded as an “employee” for employment law purposes, as a leading UK Supreme Court case established[3]. (NB Tax only recognises a person as “self-employed” or “employed” without the intermediate status of “worker”, which is a category recognised in employment law.)
Whilst the description the parties to an arrangement apply to their dealings, eg “consultancy” or “employment”, will not necessarily be conclusive (and can be overridden by a tribunal where the “label” does not reflect the actual legal relationship), there are steps which can be taken to evidence intentions if a consultancy is the chosen basis of engagement. Note that no one factor will necessarily be fatal to an argument that someone is, or is not, a consultant – the factors and nature of the arrangement will usually be considered as a whole.
- Ideally, there should be a definite duration for the arrangement, ie not open-ended, as the latter might imply ongoing obligations of the parties to do and provide work as regards the consultant and the company respectively.
- Payment for the consultant’s services ought to be on production of invoices and not through payroll. The consultant should also be responsible for paying their own taxes and social security contributions.
- The consultant should have flexibility to decide when and how they do work and will usually bear the cost of putting right work which is incorrect (ie by doing so in their own time without additional charge).
- Where feasible, the consultant should have the option of appointing a substitute to provide services in their place; this contrasts with the concept of performing services personally which is characteristic of employment.
- The relationship between a consultant and their client would not generally be exclusive since the consultant should be in business independently. An attempt to “tie” the consultant into an exclusive relationship might mean it is viewed as one of employment due to the element of co-dependence and the degree of control exercised by the recipient of the consultancy services.
- Where possible, the consultant should be permitted to use their own equipment and tools since they will, as a rule, be expected to incur expenses and capital costs in generating the fees they charge for services.
- As a rule, a consultant should not be “integrated” into the client organisation, ie avoid assigning them an internal role/areas of responsibility, and they should not usually manage staff of the client’s business.
- A consultant would not be expected to be paid when unable to work due to sickness or if absent on holiday and they should not get other employee-type benefits eg pension or be eligible to participate in a bonus scheme.
- It is advisable to keep the arrangements between the parties under review and monitor to ensure that they operate in practice as per the consultancy agreement and do not “slide” or evolve into employment. This may be particularly relevant where the relationship has historically been one of employment and the individual stays on in the capacity of consultant to his or her previous employer eg because he or she has specific expertise or experience that the former employer wishes to retain access to.
- Sometimes, a consultant will use a personal services company (PSC) via which to provide services. This puts an additional entity between the consultant and the client which receives the consultancy services. If, disregarding the use of the PSC, the employee would be regarded as being employed by the client then they will be “deemed” to be so employed with the client being liable for deducting tax on “earnings” and paying National Insurance etc.[4] This does not mean that a PSC cannot be used but care must be taken to consider the nature of the arrangement and whether, ultimately, the individual retained as consultant is genuinely in business on their own behalf.
Consultancy arrangements often give rise to technical points relating to tax and employment law and it is advisable to obtain advice in the specific circumstances of a case. The above are general discussion points and pointers only.
References:
[1] The term “contractor” is often used synonymously.
[2] See our article on “Employment Status”.
[3] Autoclenz Ltd v Belcher and others [2011] IRLR 820.
[4] See further GN50 Personal Service Companies issued by the Treasury, Income Tax Division.
